Thoughts and observations on investing in renewable energy in 2020

Yesterday I attended a breakfast panel discussion hosted at Norton Rose Fulbright aimed at sharing thoughts of some of the renewables sector's leading advisers (feat. our own Ilesh Patel) among the investment community. Below are some of the panel's more interesting observations, and one or two of my own thoughts on them.

1.  2019 was a turning point for renewables ambition among both corporate users and generators, as evidenced by the recent step-change-in-scale announcements for both Microsoft and Brookfield Renewable Partners. Both the scale of deployment and, on the user side, the pace of decarbonisation activity is scaling up. Policymakers have yet to catch up in terms of urgency.
2. Merchant models are emerging for renewable power in OECD countries, though the risk - return profile is shifting and there are bumps on the road. Subsidy schemes are coming to an end, and with them the prospect of double digit returns on renewables projects. Both investors and lenders are accepting more risk on projects in order to generate minimum expected returns. This is precipitating more complicated revenue models with multiple contracts in place instead of the traditional financial model built around a single-subsidy-scheme with a merchant tail. Such complexity is new but manageable - pension funds have had to build capability in similarly tricky markets (e.g., real estate) over the past number of years
3. Within these, the nature of corporate PPAs is changing as corporate procurement becomes more sophisticated. Corporates are increasingly seeking firm volume and negotiation is moving from ESG to procurement teams. Key barriers relate to risk as much as pricing, and successful deals consequently requiring engagement and sign off at CFO level

My own thoughts on the corporate PPA discussion: Having worked in this space quite a bit over the past year, both long-term price risk and credit risk may eventually put a real brake on corporate PPA growth. Most mid-tier energy users, as well as entire sectors where volumes and prices are volatile (e.g., agri-food), will have green ambitions but will hesitate in signing up to a 15 year fixed price contract . Equally, the pool of parties with credit ratings that banks can lend against for 15 years is very finite. A solution (policy or market based) that leverages the increasing will of corporates to decarbonise in deployment of RE while negotiating around these risk barriers will unlock a huge market.

1. New models are needed for emerging economies where risk is substantially higher and transaction costs need to be lower. Transaction platforms and methods of warehousing risk away from generators / offtakers will unlock opportunities in this space. The lack of centralised power infrastructure in many areas means big projects are not necessarily the best means of engagement. Local off-grid solutions should be targeted.
2. The hydrogen economy is still some way off, but localised 'black' (i.e. non-green) hydrogen opportunities will soon provide the first wave of deployment. Within these early cases, value may be found (though this was contested) through looking at whole-value-chain examples in established chemicals with large end-markets e.g., hydrogen-enabled caustic soda, bio-methanol, ammonia. Opportunities requiring transport infrastructure will take longer as the cost of building / upgrading infrastructure is still prohibitively high. Cities face a choice between hydrogen-enabled mobility and EV-enabled mobility as there is no rationale for having both. Japan was cited as a sandbox case for a hydrogen-led approach
3. Battery markets still challenged by absence of bankable revenue streams, while nuclear to be dominated by China and Russia. Other countries such as UK and France may build nuclear again but it may be driven more by synergies with military strategy than pure economics. (Note, while both nuclear and batteries are highly topical, they got less airtime yesterday)

Panel members:

·        Anne Lapierre, Norton Rose Fulbright

·        Vincent Dwyer, Energy Estate

·        Ilesh Patel, Baringa

·        Rob Todd, HSBC Bank plc

·        Jaz Bains, RES

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